The lifetime gift exemption, which for 2025 is $13.99 million per individual and $27.98 million per couple, if planning includes gift-splitting election or portability. The annual exclusion, which for 2025 is $19,000 per individual and $38,000 per married couple, if filing and electing gift splitting.
For 2025, the U.S. federal estate and gift tax exemption is $13.99 million per person, allowing individuals to transfer this amount tax-free, with the annual gift tax exclusion at $19,000 per recipient, but these generous amounts are set to expire at the end of 2025, reverting to roughly half that amount in 2026 unless Congress acts, with some recent legislation potentially extending this high exemption.
Key takeaways
The One Big Beautiful Bill Act makes higher lifetime estate tax exemptions permanent. Starting January 1, 2026, the federal lifetime estate tax exemptions rises to $15 million per individual and $30 million for married couples, indexed annually for inflation.
Starting in 2025, most non-spouse beneficiaries inheriting an IRA must take annual Required Minimum Distributions (RMDs) and empty the account by the end of the 10th year after the owner's death, a stricter rule from the SECURE Act, with penalties for non-compliance. Key changes mean adult children and others face annual withdrawals, even if the owner died before their own RMD date, ending the "stretch IRA" for most, though Eligible Designated Beneficiaries (spouses, disabled, etc.) have exceptions. Planning is crucial to avoid the 25% IRS penalty.
At the end of 2025, the historically high gift, estate, and generation-skipping exemption levels of $13.99 million per person (as of 2025), were slated to revert to the pre-2017 Tax Cuts and Jobs Act levels (TCJA) of $5 million per person (plus annual inflation adjustments) due to the sunset provisions of the TCJA.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.
Major U.S. tax changes for 2025, largely driven by the "One Big Beautiful Bill" (OBBBA) Act, include permanent increases to the standard deduction, expanded Child Tax Credit, a higher SALT deduction cap, new deductions for seniors, tips, and auto loan interest, plus a permanent 20% pass-through deduction, while phasing out clean energy credits. These changes, effective for the 2025 tax year (filing in 2026), make many prior temporary provisions permanent and introduce new tax breaks for individuals and businesses.
You generally can't completely avoid the 10-year rule on an inherited IRA unless you're an Eligible Designated Beneficiary (EDB) like a spouse, minor child, disabled/chronically ill person, or someone within 10 years younger than the owner, allowing for life expectancy payouts. Other strategies involve spouses rolling it into their own IRA, using trusts like Charitable Remainder Unitrusts (CRUTs) for tax spreading, or strategic planning to take larger distributions within the 10 years to reduce the final year's tax hit, all requiring expert advice.
Beneficiaries generally do not pay income tax on the principal amount of inherited cash or bank accounts, but they do pay taxes on any interest earned after the date of death, and on certain pre-tax retirement funds (like traditional IRAs). State laws vary, with some states having specific inheritance or estate taxes, while federal estate tax usually falls on the estate itself, not the beneficiary.
A "rollover rule loophole" often refers to using the 60-day rollover rule to access IRA funds temporarily as a short-term, tax-free loan or employing strategies like the Backdoor Roth IRA to bypass income limits, though the IRS scrutinizes these; another "loophole" involves the strict once-per-year IRA-to-IRA rollover limit, which some misinterpret, but rules exist for exceptions like the 72(t) SEPPs for early access, requiring expert tax advice for compliance.
The new law will increase the estate tax exemption to $15 million for single people and $30 million for couples in 2026 and allow it to rise with inflation moving forward. In other words, a couple will be able to leave $29.99 million to their heirs in 2026 without paying a cent of estate tax.
Ways to reduce Inheritance Tax
Is There Estate Tax in Canada? Contrary to common belief, Canada does not levy a formal estate or inheritance tax. Beneficiaries do not pay tax on the amount they inherit.
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
Inheritance law in 2026 (specifically federal US law) involves a major shift as the estate and gift tax exemption is set to revert from its temporarily inflated 2025 level (around $14M) back to its pre-2018 inflation-adjusted level, potentially around $7 million per individual, creating a critical planning window in late 2025 to "lock in" the higher exemption using tools like SLATs (Spousal Lifetime Access Trusts). While state laws vary (some states have separate inheritance taxes), the main federal change means significantly lower thresholds for tax-free wealth transfer starting in 2026, making proactive estate planning crucial for high-net-worth individuals to avoid substantial taxes.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
The best thing to do with an inherited IRA depends on your situation, but generally involves either rolling it into a new Inherited IRA (to stretch distributions over 10 years or your lifetime if a spouse) for continued tax-deferred growth or taking a lump-sum distribution if you need cash immediately, understanding that traditional IRA funds become taxable income. Spouses have more options, including treating it as their own, while most non-spouses must empty the account within 10 years, potentially taking annual Required Minimum Distributions (RMDs) if the original owner was 73+. Always consult a financial advisor to navigate the complex rules and tax implications.
For simplicity's sake, let's assume a hypothetical investor has one IRA with an account balance of $100,000 as of December 31 of the prior year. To calculate the RMD the year they turn 73, they would use a life expectancy factor of 26.5. So the RMD would be $100,000 ÷ 26.5, or $3,773.58.
Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the tenth year after the year in which the account holder died. Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
April 10, 2025, the House adopted the Senate's amended version of the budget resolution, which allows $5.3 trillion in deficit-financed tax cuts (the combination of $3.8 trillion of tax cuts assumed to be “costless” under a current policy baseline plus $1.5 trillion in additional deficits permitted), deficit increases ...